REPORT ON EXAMINATION
ADIRONDACK INSURANCE EXCHANGE
DECEMBER 31, 2008
DATE OF REPORT JANUARY 29, 2010
EXAMINER FE ROSALES, CFE
TABLE OF CONTENTS
ITEM NO. PAGE NO.
1. Scope of examination 2
2. Description of Exchange 3
A. Management 3
B. Territory and plan of operation 5
C. Reinsurance 6
D. Holding company system 8
E. Significant operating ratios 10
F. Accounts and records 10
3. Financial statements 12
A. Balance sheet 12
B. Underwriting and investment exhibit 14
4. Losses and loss adjustment expenses 15
5. Compliance with prior report on examination 15
6. Summary of comments and recommendations 16
STATE OF NEW YORK
25 BEAVER STREET
NEW YORK, NEW YORK 10004
January 29, 2010
Honorable James J. Wrynn
Superintendent of Insurance
Albany, New York 12257
Pursuant to the requirements of the New York Insurance Law, and in compliance with the
instructions contained in Appointment Number 30361 dated June 24, 2009, and attached hereto, I
have made an examination into the condition and affairs of Adirondack Insurance Exchange as of
December 31, 2008, and submit the following report thereon.
Wherever the designation “the Exchange” appears herein without qualification, it should be
understood to indicate Adirondack Insurance Exchange.
Wherever the term “Department” appears herein without qualification, it should be
understood to mean the New York Insurance Department.
The examination was conducted at the Exchange’s attorney-in-fact’s office at One Beacon
Lane, Canton, MA 02021.
1. SCOPE OF EXAMINATION
The Department has performed a single-state examination of Adirondack Insurance
Exchange. This is the first financial examination of the Exchange after the report on organization,
which was conducted as of May 17, 2006. This examination covered the period from May 18, 2006
through December 31, 2008. Transactions occurring subsequent to this period were reviewed where
deemed appropriate by the examiner.
This examination was conducted in accordance with the National Association of Insurance
Commissioners (“NAIC”) Financial Condition Examiners Handbook (“Handbook”), which requires
that we plan and perform the examination to evaluate the financial condition and identify prospective
risks of the Exchange by obtaining information about the Exchange including corporate governance,
identifying and assessing inherent risks within the Exchange and evaluating system controls and
procedures used to mitigate those risks. An examination also includes assessing the principles used
and significant estimates made by management, as well as evaluating the overall financial statement
presentation, management’s compliance with Statutory Accounting Principles and annual statement
instructions when applicable to domestic state regulations.
All accounts and activities of the Exchange were considered in accordance with the risk-
focused examination process. The examiners also relied upon audit work performed by the
Exchange’s independent public accountants when appropriate.
This examination report includes a summary of significant findings for the following items as
called for in the Handbook:
Significant subsequent events
Management and control
Fidelity bonds and other insurance
Pensions, stock ownership and insurance plans
Territory and plan of operation
Growth of Exchange
Accounts and records
Summary of recommendations
This report on examination is confined to financial statements and comments on those matters
that involve departures from laws, regulations or rules, or that are deemed to require explanation or
2. DESCRIPTION OF EXCHANGE
Adirondack Insurance Exchange was incorporated under the laws of the State of New York
on May 25, 2006. It became licensed on May 25, 2006 and commenced business on the same date.
The Exchange was organized by White Mountains Insurance Group, Ltd., Bermuda (“White
Mountains”) with an initial surplus to policyholders of $70,700,000. The initial surplus was provided
by Homeland Insurance Company of New York, a subsidiary of White Mountains, pursuant to a loan
agreement conforming to Section 1307 of the New York Insurance Law, which provides that such
loan may only be repaid out of free and divisible surplus of such insurer with the approval of the
Pursuant to the Exchange’s declaration of initial subscriber and by-laws, management of the
Exchange is vested in the advisory committee consisting of not less than nine members nor more than
twelve members. The advisory committee meets annually during each calendar year. At December
31, 2008, the advisory committee was comprised of the following nine members:
Name and Residence Principal Business Affiliation
J. Paul Amaden, Sr. President and Chief Executive Officer,
East Hampton, NY Amaden Gay Agencies, Inc.
Louis Atti Vice President,
Angola, NY ENB Insurance Agency, Inc.
David R. Bauer President,
Albany, NY Capital Bauer Insurance Agency Inc.
Elizabeth M. Gardner Operations Manager,
South Hampton, NY Maran Corporate Risk Associates, Inc.
Thomas Scott McDaniel President and Chief Executive Officer,
Williamsville, NY Adirondack AIF, LLC
Name and Residence Principal Business Affiliation
John Scherrer President,
Williamsville, NY The Northwoods Corporation,
Potter, Harris & Scherrer Agency, Inc.
John Vincent Stype President,
Aquebogue, NY Neefus Stype Agency, Inc.
Joseph Tedesco Vice President,
Harrison, NY DeRosa, Rockefeller, Sohigian, Werdal Agency
Michael Kelly Zimmerman Vice President, Claims
Williamsville, NY OneBeacon Insurance Company
A review of the minutes of the advisory committee’s meetings held during the examination
period indicated that the two annual meetings were generally well attended and each advisory
committee member had an acceptable record of attendance.
However, the review of the minutes of the advisory committee revealed that the investment
transactions for the years 2007 and 2008 were not formally voted upon and approved by the advisory
committee during its annual meeting. It is important to note that materials which include the
investment schedules (acquisitions & disposals report) were presented during the meeting; however,
the minutes did not reflect that such materials were approved.
Therefore, it appears that the Exchange did not fully comply with the Section 1411(a) of New
York Insurance Law which states in part that:
No domestic insurer shall make any loan or investment ... unless authorized or approved by
its board of directors or a committee thereof responsible for supervising or making such
investment or loan . . .
It is therefore recommended that the advisory committee formally vote and approve the
Exchange’s investment transactions at every meeting and that the minutes indicate such approvals to
ensure full compliance with Section 1411(a) of New York Insurance Law.
As of December 31, 2008, the principal officers of Adirondack AIF, LLC, the Attorney-in-
Fact for the Exchange, were as follows:
Thomas S. McDaniel President and Chief Executive Officer
Dennis Robert Smith Secretary
Todd Colin Mills Treasurer
Alexander Constantine Archimedes Vice President
Bradford Whitman Rich Vice President and General Counsel
B. Territory and Plan of Operation
As of December 31, 2008, the Exchange was licensed to write business in New York only.
As of the examination date, the Exchange was authorized to transact the kinds of insurance as
defined in the following numbered paragraphs of Section 1113(a) of the New York Insurance Law:
Paragraph Line of Business
5 Miscellaneous property
6 Water damage
7 Burglary and theft
13 Personal injury liability
14 Property damage liability
19 Motor vehicle and aircraft physical damage
20 Marine and inland marine
21 Marine protection and indemnity
22 Residual value
Based on the lines of business for which the Exchange is licensed and pursuant to the
requirements of Articles 13 and 41 of the New York Insurance Law, the Exchange is required to
maintain a minimum surplus to policyholders in the amount of $9,900,000.
The following schedule shows the direct premiums written by the Exchange both in total and
in New York for the period under examination:
Premiums Written in New York State as a
Calendar Year New York State Total Premiums Percentage of Total Premium
2006 $ 54,566,034 $ 54,566,034 100.00%
2007 $189,933,712 $189,933,712 100.00%
2008 $181,375,721 $181,388,084 99.99%
The Exchange’s primary focus is providing personal lines property and casualty insurance
coverages including but not limited to: automobile, homeowners, personal umbrella and dwelling fire
in New York. The Exchange sells these personal lines property and casualty insurance products
through a network of independent agents targeting markets in the state of New York.
The Exchange did not assume reinsurance business for the period under examination.
Ceded Reinsurance Program
The Exchange has structured its ceded reinsurance program to limit its maximum exposure on
any one risk as follows:
The Exchange’s ceded reinsurance program for its property business is to limit its maximum
exposure in any one risk to $1 million. The Exchange maintains an excess of loss coverage for
standard losses which consists of one layer. Reinsurers’ single loss limit of liability is $5 million and
the total cumulative policy limit is $20 million during any one contract year.
The Exchange also maintains excess of loss coverage for property loss resulting from
catastrophe event consisting of the following four layers.
Type of Treaty Cession
Property Catastrophe excess of loss – $290,000,000 excess of $10,000,000 per
Four layers as follows: occurrence
1st Layer – 54% authorized $10,000,000 excess of $10,000,000
2nd Layer – 39% authorized $30,000,000 excess of $20,000,000
3rd Layer – 58% authorized $80,000,000 excess of $50,000,000
4th Layer – 56% authorized $170,000,000 excess of $130,000,000
The Exchange has structured its ceded reinsurance program for its casualty lines of business
to limit its maximum exposure in any one risk to $1 million. The Exchange maintains an excess of
loss coverage for standard losses which consists of one layer. Reinsurers’ single loss limit of liability
is $5 million and the total cumulative policy limit is $15 million.
Personal Line Automobile Quota Share
The Exchange also maintains an 8% quota share program for its personal lines automobile
business with the following maximum limits:
Automobile bodily injury liability: $500,000 each person, $1 million each
Automobile property damage liability: $500,000 each occurrence
Automobile bodily injury and property damage liability (combined single limit):
$1 million each occurrence
Automobile medical payments: $50,000 each person
Automobile property damage: $500,000 each vehicle
Personal injury protection: $100,000 each person
However, in the event that the limits outlined above are exceeded, the reinsurer’s liability will
not exceed its quota share portion of $6,250,000 for all coverages, all policies, any one occurrence.
During the period covered by this examination, majority of the Exchange’s ceded reinsurance
treaties were with authorized reinsurers.
It is the Exchange's policy to obtain the appropriate collateral for its cessions to unauthorized
reinsurers. The examiner did not review these letters of credit for compliance with Department
Regulation No. 133 since the amounts held under these letters of credit were not material.
All significant ceded reinsurance agreements in effect as of the examination date were
reviewed and found to contain the required clauses, including an insolvency clause meeting the
requirements of Section 1308 of the New York Insurance Law.
Examination review of the Schedule F data reported by the Exchange in its filed annual
statement was found to accurately reflect its reinsurance transactions. Additionally, management has
represented that all material ceded reinsurance agreements transfer both underwriting and timing risk
as set forth in NAIC Accounting and Procedures Manual, Statements of Statutory Accounting
Principles (“SSAP”) No. 62. Representations were supported by appropriate risk transfer analyses
and an attestation from the Exchange's chief executive officer pursuant to the NAIC Annual
Statement Instructions. Additionally, examination review indicated that the Exchange was not a
party to any finite reinsurance agreements. All ceded reinsurance agreements were accounted for
utilizing reinsurance accounting as set forth in SSAP No. 62.
D. Holding Company System
The Exchange is controlled by Adirondack AIF, LLC (“AAIF”), its Attorney-in-Fact. AAIF
is a wholly-owned subsidiary of OneBeacon Insurance Group, LLC, which is ultimately controlled by
White Mountains Insurance Group, Ltd. of Bermuda.
A review of the holding company registration statements filed with this Department indicated
that such filings were complete and were filed in a timely manner pursuant to Article 15 of the New
York Insurance Law and Department Regulation 52.
The following is an abridged chart of the holding company system at December 31, 2008:
White Mountains Insurance Group, Ltd.
OneBeacon Insurance Group, LLC
Adirondack AIF, LLC
Adirondack Insurance Exchange
At December 31, 2008, the Exchange was party to the following agreements with other
members of its holding company system:
1. Insurance Management Service Agreement with Adirondack AIF, LLC.
The Exchange was a party to an insurance management agreement with Adirondack AIF,
LLC pursuant to which, AAIF agreed to provide all necessary services for the operation of the
Exchange including the right to perform solicitation, underwriting, classification of risk, rating of and
premium determination for insurance contracts, adjusting of claims, collection of monies due to the
Exchange; issuing, modifying and terminating insurance contracts, and the authority to determine
appropriate premiums rates. The management fee is 14% of gross written premiums. It is noted that
this agreement was non-objected to by the Department.
2. Investment Management Agreement with White Mountains Advisors, LLC
The Exchange was also a party to an investment management agreement with White
Mountains Advisors, LLC ("WMA") pursuant to which, WMA provides investment research and
advice, including the execution of orders for the purchase and sale of securities. The agreement
states that WMA will act as a discretionary advisor with respect to the assets of the Exchange and
supervise the investments as described in the investment guidelines. WMA agrees to provide the
Exchange with reports containing the status of the investment account at least monthly, and will
provide written advisory report letters to the Exchange on a quarterly basis. It is noted that this
agreement was non-objected by the Department.
E. Significant Operating Ratios
The following ratios have been computed as of December 31, 2008, based upon the results of
Net premiums written to surplus as regards policyholders 239%
Liabilities to liquid assets (cash and invested assets less investments in affiliates) 75%
Premiums in course of collection to surplus as regards policyholders 23%
All of the above ratios fall within the benchmark ranges set forth in the Insurance Regulatory
Information System of the National Association of Insurance Commissioners.
The underwriting ratios presented below are on an earned/incurred basis and encompass the
two-year and seven-month period covered by this examination:
Losses and loss adjustment expenses incurred $182,683,400 60.87%
Other underwriting expenses incurred 140,228,751 46.73
Net underwriting loss (22,804,111) (7.60)
Premiums earned $300,108,040 100.00%
F. Accounts and Records
A review of the Exchange’s accounts, records and annual statement reporting revealed the
1. Annual Statement Preparation
During this examination, the following errors in reporting certain items in the filed 2008
Annual Statement have been identified:
i. In Schedule E – Part 1 – Cash, the Exchange incorrectly identified the bank holding its cash
deposit of $6,144,098 as Bank of America. The correct bank should have been Bank of New
It is recommended that the Exchange exhibit greater care in the preparation of its filed annual
2. Uncollected Premiums Over 90 days Past Due
A review of the filed annual statements as of December 31, 2006, 2007 and 2008 revealed
that the Exchange reported “zero” amount under non-admitted assets – (over 90 days past due for the
uncollected premiums and agents’ balances in the course of collection - annual statement line 13.1).
However, based upon the review of the information provided by the Exchange for uncollected
premiums and agents’ balance in course of collection, it was noted that uncollected premiums over 90
days past due amounted to $174,233.
Section 1301(a)(6) of the New York Insurance Law states in part:
In determining the financial condition of a domestic insurer … there may be
allowed as an admitted assets of such insurer … Premiums in course of collection
… not more than ninety days past due …
Based on the above-noted information, the Exchange did not comply with the above-
referenced section of the law because it included uncollected premiums over 90 days past due as
admitted assets in its 2008 filed annual statement.
It is recommended that the Exchange comply with Section 1301(a)(6) and going forward
report all uncollected premiums over ninety days past due as non-admitted assets in future annual
statement filed with the Department.
3. FINANCIAL STATEMENTS
A Balance Sheet
The following shows the assets, liabilities and surplus as regards policyholders as of
December 31, 2008 as determined by this examination and as reported by the Exchange:
Assets Assets Not Net Admitted
Assets Admitted Assets
Bonds $160,012,569 $ 0 $160,012,569
Cash, cash equivalents and short-term investments 32,969,774 0 32,969,774
Investment income due and accrued 1,562,903 0 1,562,903
Uncollected premiums and agents' balances in the course
of collection 15,349,606 0 15,349,606
Deferred premiums, agents' balances and installments booked
but deferred and not yet due 22,495,605 0 22,495,605
Amounts recoverable from reinsurers 944,148 0 944,148
Net deferred tax asset 1,504,309 0 1,504,309
Sundry balances 1,645,533 107,547 1,537,986
Total assets $236,484,447 $107,547 $236,376,900
Liabilities, Surplus and Other Funds Surplus
Liabilities Examination Exchange (Decrease)
Losses and Loss adjustment expenses $ 66,038,199 $ 64,102,199 $(1,936,000)
Commissions payable, contingent commissions and other similar
charges 9,061,889 9,061,889 0
Other expenses (excluding taxes, licenses and fees) 2,107,309 2,107,309 0
Taxes, licenses and fees (excluding federal and foreign income taxes) (1,112,395) (1,112,395) 0
Unearned premiums 80,154,082 80,154,082 0
Advance premium 1,908,277 1,908,277 0
Ceded reinsurance premiums payable (net of ceding commissions) 1,228,447 1,228,447 0
Amounts withheld or retained by company for account of others 549 549 0
Drafts outstanding 3,139,286 3,139,286 0
Payable to parent, subsidiaries and affiliates 3,164,317 3,164,317 0
Aggregate write-ins for liabilities 4,853,658 4,853,658 0
Total liabilities $170,543,618 $168,607,618 $(1,936,000)
Surplus and Other Funds
Surplus notes $ 70,700,000 $ 70,700,000 $ 0
Unassigned funds (surplus) (4,866,718) (2,930,718) (1,936,000)
Surplus as regards policyholders $ 65,833,282 $ 67,769,282 $ (1,936,000)
Total liabilities, surplus and other funds $236,376,900 $236,376,900
NOTE: The Internal Revenue Service has never audited of the Exchange’s Federal Income Tax
B. Underwriting and Investment Exhibit
Surplus as regards policyholders decreased $4,866,718 during the two-year and seven-month
period examination period May 18, 2006 through December 31, 2008, detailed as follows:
Premiums earned $300,108,040
Losses incurred $ 53,649,011
Loss adjustment expenses incurred 29,034,389
Other underwriting expenses incurred 140,228,751
Total underwriting deductions 322,912,151
Net underwriting gain or (loss) $ (22,804,111)
Net investment income earned $16,603,107
Net realized capital gain (548,427)
Net investment gain or (loss) 16,054,680
Net gain or (loss) from agents' or premium balances charged off $ (217)
Finance and service charges not included in premiums 186,323
Aggregate write-ins for miscellaneous income 405,249
Total other income 591,355
Net income before dividends to policyholders and before federal
and foreign income taxes $ (6,158,076)
Dividends to policyholders 0
Net income after dividends to policyholders but before federal
and foreign income taxes $ (6,158,076)
Federal and foreign income taxes incurred (28,943)
Net income $ (6,129,133)
Surplus as regards policyholders per report on
examination as of May 17, 2006 $70,700,000
Gains in Losses in
Net income $ 0 $6,129,133
Net unrealized capital gains or (losses) 0 88,080
Change in net deferred income tax 1,458,042
Change in nonadmitted assets 0 107,547
Total gains and losses $1,458,042 $6,324,760
Net increase (decrease) in surplus (4,866,718)
Surplus as regards policyholders per report on
examination as of December 31, 2008 $65,833,282
NOTE: This is the first examination of the Exchange.
4. LOSSES AND LOSS ADJUSTMENT EXPENSES
The examination liability for the captioned items of $66,038,199 is $1,936,000 more than the
$64,102,199 reported by the Exchange in its December 31, 2008, filed annual statement. The
examination analysis of the loss and loss adjustment expense reserves was conducted in accordance
with generally accepted actuarial principles and was based on statistical information contained in the
Exchange’s internal records and in its filed annual statements.
It is noted that the Exchange has recognized approximately $970,000 of the estimated
deficiency in its 2009 annual statement.
5. COMPLIANCE WITH PRIOR REPORT ON EXAMINATION
There is no prior report on examination as this is the first examination of the Exchange.
6. SUMMARY OF COMMENTS AND RECOMMENDATIONS
ITEM PAGE NO.
It is recommended that the Advisory Committee formally vote and 4
approve the Exchange’s investment transactions at every meeting and
that the minutes indicate such approvals to ensure full compliance with
Section 1411(a) of New York Insurance Law.
B. Accounts and records
i. It is recommended that the Exchange exhibit greater care in the 11
preparation of its filed annual statement.
ii. It is recommended that the Exchange comply with Section 1301(a)(6) 11
and going forward report all uncollected premiums over ninety days
past due as non-admitted assets in future annual statement filed with the
Fe Rosales, CFE
Associate Insurance Examiner
STATE OF NEW YORK )
COUNTY OF NEW YORK )
FE ROSALES, being duly sworn, deposes and says that the foregoing report, subscribed by her,
is true to the best of her knowledge and belief.
Subscribed and sworn to before me
this day of , 2010.